A fundamental contribution of the Varieties of Capitalism perspective lies in its ability to link institutional frameworks with specific patterns of change. The occurrence of common developments across national business systems does not lead to convergence precisely since it is mediated by the presence of different institutional frameworks.
Otherwise, the relevance of institutional variables would be seriously undermined. The Varieties of Capitalism perspective highlights the presence of institutional differences on the decision-making process in important issue areas as the refractor of new developments. The role of institutional frameworks in shaping the direction and content of change has figured prominently in this paper: the low prominence of takeovers in Spain by foreign companies (section 2.2), and the high prominence of takeovers in Britain (section 2.1).
Market for Corporate Control in Spain
The low prominence of the market of corporate control over the evolution of the Spanish electricity sector has been shaped by key institutional arrangements found in the spheres of corporate governance and employment relations. The first institution that mediates against the prominence of takeovers in Spain is the ownership structure of companies. By contrast to the complete dispersion of ownership that prevailed in Britain, electricity companies in Spain are characterised by overall ownership concentration. The stake of the hard core shareholding group in the three largest companies was the following from 2000 to 2006: Endesa (between 9 and 29 per cent), Iberdrola (between 13 and 27 per cent), and Union Fenosa (between 23 and 62 per cent) (see Table 3). The stake of the individual members of the hard core shareholding group was magnified due to the low attendance at the Annual General Meeting (AGM) of electricity companies. For instance, the quorum at the 2004 was 37.4 percent – thereby increasing the voting power of core shareholders (Endesa, 2007: 82). The magnified voting power of core shareholders, however, is limited to 10 per cent of the voting rights of electricity companies in Spain. The institutional arrangements of corporate law allow companies to implement deviations from the one share-one vote principle. The three largest electricity companies have relied on voting ceilings as a form of protection against takeovers. The use of voting ceilings prevented a full magnification of the powers of hard core shareholders, but also served to protect against the predatory actions of uninvited bidders.
The low prominence of takeovers in the Spanish electricity sector also reflected the institutional arrangements associated with the regulatory approval of M&A. Overall, the process of delegation to NRAs in Spain is characterised by the presence of two
regulatory authorities – the Competition Tribunal (Tribunal de Defensa de la Competencia) and the National Energy Commission (Comisión Nacional de Energia) -- that are issuing non-binding recommendations. In other words, regulatory authorities possess some degree of independence, but these institutions act as advisories body for the sponsoring ministry which monopolises most important decision-making functions (Genoud, 2003). A final institutional hurdle in the market for corporate control in the Spanish electricity sector is the rigid regime on dismissals in employment relations (see OECD, 1999). This institutional arrangement impacts on the motivations of bidding companies. The post-acquisition options for successful bidders are limited. The ability to implement restructuring schemes involving important layoffs are difficult to implement and, as a result, cannot be used as a strategy to compensate for takeover premium fees.
These four institutional features – ownership concentration, voting ceilings, lower degrees of independence, and rigid labour markets – strongly militated against the occurrence of takeovers in the evolution of the Spanish electricity sector. These institutional arrangements are complementary – the presence of one improves on the effectiveness of others. For instance, the ability of concentrated pattern of ownership to deter takeover bids is reinforced by the by-law that limits the voting power of potential bidders. Similarly, the E.ON (and Gas Natural) bid for Endesa reflected the growing ownership diffusion at Endesa by 2005 (see Table 3). Otherwise, it would have been extremely difficult for E.ON to even envisage the possibility of a successful takeover bid for Spain’s largest electricity firm.
Market for Corporate Control in Britain
The evolution of the electricity sector in Britain constitutes the paradigmatic case of takeovers exercising a high degree of prominence over its evolution. The entire privatised electricity sector has been the target of successful takeover bids from foreign companies. The bulk of these successful takeover bids, moreover, were unsolicited. Incumbent management either fought these bids or gave up early in the face of insurmountable odds (Deakin et al., 2002). The liberalisation of the electricity sector was an important event in the regulation of network industries and constituted an integral part of Thatcher’s program to roll back the state and to assign greater prominence to market mechanisms in the allocation of resources (Thomas, 2001 and 2006a). In particular, the Thatcher administration viewed favourably the introduction of competition in the sector via the entry of new players in the market. The market for corporate control, in this context, was interpreted as a source of discipline on the management of electricity companies. However, the ultimate outcome of the transformation of the electricity sector in Britain is one where the industry is currently dominated by a fewer (as compared to 1990) number of firms involved in both generation and distribution and, moreover, with little incentives to compete against each other (Thomas, 2006b). This outcome was not anticipated or initially planned by policy- makers – takeovers were conceptualised as a mean (not an end) for achieving greater competition in the electricity sector (Helm, 2003). Why have takeovers trumped other factors in the evolution of the electricity sector?
The argument presented in this paper highlights the role of institutional frameworks in mediating a new development – namely the preferences of policy-makers for greater competition in the sector. State officials might possess defined preferences for the evolution of the sector, but institutional frameworks shape how those preferences eventually influence the evolution of the sector. In particular, the decision to frame competition as the break-up of the market power of the National Power-Powergen duopoly led to an unintended consequence: the predominance of takeovers over other factors in the evolution of the electricity sector. Two central aspects of the institutional framework in which English electricity companies were embedded militated for the importance of the market for corporate control. First, the decision to frame the notion of competition as the break-up of the market of the duopolistic system was not neutral in
regard to the future direction of the sector. It meant that takeovers by foreign firms were not seen as a threat to competition as compared to the duopolistic structure of the sector. This particular framing must be seen in the context of the dispersed ownership structure of companies and the overall respect of the one share-one vote principle. The conceptualisation of competition as the breaking-up of the domestic duopoly at the expense of other factors was conducive to the prominence taken by takeovers, not because of the preferences of policy-makers, but as a result of under-emphasising the consequences associated with ownership dispersion and a system voting rights that is protective of minority shareholders. The process of framing competition as the break-up of the domestic duopoly would have produced different consequences if the ownership structure of companies had been characterised by ownership concentration and/or deviations from the one share-one vote principle would have been more widespread.
Second, several aspects of the regulatory framework of the electricity sector in Britain are largely immune from the influence of elected officials. The institutions associated with the regulatory approval of takeovers possess a life of their own and, therefore, mediate the influence of the choices of policy-makers. Elected officials might possess defined preferences about the nature of competition, but specific aspects of the institutional framework promote certain outcomes over others. For instance, one of the most influential institutions in the area of M&A approval in the United Kingdom is the Panel on Takeovers and Mergers. The raison d’être of the Panel on Takeovers and Mergers is to protect the rights of minority shareholders during takeover bids (Kenyon- Slade, 2004). This mission is enshrined in the principle of equal treatment for minority investors – the price per share offered by the bidding firm must be the same for all categories of shareholders; board members are subject to a fiduciary duty of good faith that limits their ability to support anti-takeover devices; and a bidder must make a formal offer for the entire stock capital of the firm if its stake crosses the 30 per cent threshold. The rights of employees are limited and confined to the area of consultation during takeover bids (Deakin et al., 2002). Moreover, the Panel on Takeovers and Mergers is a self regulatory body that derives its legitimacy from the support it receives from the institutional investors’ community – the biggest category of shareholders in the United Kingdom. The implication is that takeover proposals that make their way to the Panel on Takeovers and Mergers stand an excellent chance of being approved provided that the rights of minority shareholders are respected.